RAW DATA: Remarks of Fed Char Bernanke Before the Committee on Oversight and Government Reform

Statement of Ben S. Bernanke
Chairman
Board of Governors of the Federal Reserve System before the Committee on Oversight and Government Reform
U.S. House of Representatives
Washington, D.C.

Chairman Towns, Ranking Member Issa, and other members of the Committee,
I appreciate the opportunity to discuss the Federal Reserve's role in the acquisition by the Bank of America Corporation of Merrill Lynch & Co., Inc. I believe that the Federal Reserve acted with the highest integrity throughout its discussions with Bank of America regarding that
company's acquisition of Merrill Lynch. I will attempt in this testimony to respond to some of
the questions that have been raised.

Background

On September 15, 2008, Bank of America announced an agreement to acquire Merrill
Lynch. I did not play a role in arranging this transaction and no Federal Reserve assistance was
promised or provided in connection with that agreement. As with similar transactions, the
transaction was reviewed and approved by the Federal Reserve under the Bank Holding
Company Act in November 2008. It was subsequently approved by the shareholders of Bank of
America and Merrill Lynch on December 5, 2008. The acquisition was scheduled to be closed
on January 1, 2009.

As you know, the period encompassing Bank of America's decision to acquire Merrill
Lynch through the consummation of the merger was one of extreme stress in financial markets.
The government-sponsored enterprises, Fannie Mae and Freddie Mac, were taken into
conservatorship a week before the Bank of America deal was announced. That same week,
Lehman Brothers failed, and American International Group was prevented from failing only by
extraordinary government action. Later that month, Wachovia faced intense liquidity pressures
which threatened its viability and resulted in its acquisition by Wells Fargo. In mid-October, an
aggressive international response was required to avert a global banking meltdown. In
November, the possible destabilization of Citigroup was prevented by government action. In short, the period was one of extraordinary risk for the financial system and the global economy,
as well as for Bank of America and Merrill Lynch.

Discussions Regarding the Possible Termination of Agreement to Acquire Merrill Lynch

On December 17, 2008, senior management of Bank of America informed the Federal
Reserve for the first time that, because of significant losses at Merrill Lynch for the fourth
quarter of 2008, Bank of America was considering not closing the Merrill Lynch acquisition.
This information led to a series of meetings and discussions among Bank of America, the
regulatory agencies, and Treasury. During these discussions, Bank of America's CEO, Ken
Lewis, told us that the company was considering invoking the Material Adverse Event clause in
the acquisition contract, known as the MAC, in an attempt to rescind its agreement to acquire
Merrill Lynch.

In responding to Bank of America in these discussions, I expressed concern that invoking
the MAC would entail significant risks, not only for the financial system as a whole but also for
Bank of America itself, for three reasons. First, in light of the extreme fragility of the financial
system at the time, the uncertainties created by an invocation of the MAC might have triggered a
broader systemic crisis that could well have destabilized Bank of America as well as Merrill
Lynch. Second, an attempt to invoke the MAC after three months of review, preparation, and
public remarks by the management of Bank of America about the benefits of the acquisition
would cast doubt in the minds of financial market participants--including the investors, creditors,
and customers of Bank of America--about the due diligence and analysis done by the company,
its capability to consummate significant acquisitions, its overall risk-management processes, and
the judgment of its management. Third, based on our staff analysis of the legal issues, we
believed that it was highly unlikely that Bank of America would be successful in terminating the
contract by invoking the MAC. Rather, an attempt to invoke the MAC would likely involve extended and costly litigation with Merrill Lynch that, with significant probability, would result
in Bank of America being required either to pay substantial damages or to acquire a firm whose
value would have been greatly reduced or destroyed by a strong negative market reaction to the
announcement. For these reasons, I believed that, rather than invoking the MAC, Bank of
America's best option, and the best option for the system, was to work with the Federal Reserve
and the Treasury to develop a contingency plan to ensure that the company would remain stable
should the completion of the acquisition and the announcement of losses lead to financial stress,
particularly a sudden pullback of funding of the type that had been experienced by Wachovia,
Lehman, and other firms.

Ultimately, on December 30, the Bank of America board determined to go forward with
the acquisition. The staff of the Federal Reserve worked diligently with Treasury, other
regulators, and Bank of America to put in place a package that would help to shore up the
combined company's financial position and reduce the risk of market disruption. The plan was
completed in time to be announced simultaneously with Bank of America's public earnings
announcement, which had been moved forward to January 16, 2009, from January 20, 2009.

The package included an additional $20 billion equity investment from the Troubled Asset Relief
Program and a loss-protection arrangement, or ring fence, for a pool of assets valued at about
$118 billion. The ring-fence arrangement has not been consummated, and Bank of America now
believes that, in light of the general improvement in the markets, this protection is no longer
needed.

Importantly, the decision to go forward with the merger rightly remained in the hands of
Bank of America's board and management, and they were obligated to make the choice they
believed was in the best interest of their shareholders and company. I did not tell Bank of
America's management that the Federal Reserve would take action against the board or
management if they decided to proceed with the MAC. Moreover, I did not instruct anyone to
indicate to Bank of America that the Federal Reserve would take any particular action under
those circumstances. I agreed with the view of others that the invocation of the MAC clause in
this case involved significant risk for Bank of America, as well as for Merrill Lynch and the
financial system as a whole, and it was this concern that I communicated to Mr. Lewis and his
colleagues.

Disclosures

The Federal Reserve also acted appropriately regarding issues of public disclosure. As I
wrote in a letter to this Committee, neither I nor any member of the Federal Reserve ever
directed, instructed, or advised Bank of America to withhold from public disclosure any
information relating to Merrill Lynch, including its losses, compensation packages or bonuses, or
any other related matter. These disclosure obligations belong squarely with the company, and
the Federal Reserve did not interfere in the company's disclosure decisions.

The Federal Reserve had a legitimate interest in knowing when Bank of America or
Merrill Lynch intended to disclose the losses at Merrill Lynch. Given the fragility of the
financial markets at that time, we were concerned about the potential for a strong, adverse
market reaction to the reports of significant losses at Merrill Lynch. If federal assistance to
stabilize these companies were to be effective, the necessary facilities would have to be in place
as of the disclosure date. Thus, our planning was importantly influenced by the companies'
planned disclosure schedule. But the decisions and responsibilities regarding public disclosure
always remained, as it should, with the companies themselves.

A related question is whether there should have been earlier disclosure of the aid
provided by the U.S. government to Bank of America. Importantly, there was no commitment
on the part of the government regarding the size or structure of the transaction until very late in
the process. Although we had indicated to Bank of America in December that the government
would provide assistance if necessary to keep the company from being destabilized, as it had
done in other cases during this time of extraordinary stress in the financial markets, those
December discussions were followed in January by significant and intense negotiations
involving Bank of America, the Federal Reserve, the Treasury, the Federal Deposit Insurance
Corporation, and the Office of the Comptroller of the Currency regarding many key aspects of
the assistance transaction, including the type of assistance to be provided, the size of the
protection, the assets to be covered, the terms for payments, the fees, and the length of the
facility. The agreement in principle on these items was reflected in a term sheet that was not
finalized until just before its public release on January 16, 2009. The Federal Reserve Board and
the Treasury completely and appropriately disclosed the information as required by the Congress
in the Emergency Economic Stabilization Act of 2008.

In retrospect, I believe that our actions in this episode, including the development of an
assistance package that facilitated the consummation of Bank of America's acquisition of Merrill
Lynch, were not only done with the highest integrity, but have strengthened both companies
while enhancing the stability of the financial markets and protecting the taxpayers. These
actions were taken under highly unusual circumstances in the face of grave threats to our
financial system and our economy. To avoid such situations in the future, it is critical that the
Administration, the Congress, and the regulatory agencies work together to develop a new
framework that strengthens and expands supervisory oversight and includes a broader range of
tools to promote financial stability.

I would be pleased to take your questions.